OECD warns global growth could fall to 2.1% if Gulf energy crisis drags into 2027

The Organisation for Economic Co-operation and Development (OECD) has sharply downgraded its outlook for the global economy, warning that a prolonged conflict in the Middle East could tip several economies into recession. Presenting its latest Economic Outlook in Paris, the organisation outlined two scenarios: a baseline that assumes a swift resolution to the crisis, and a 'dark scenario' in which disruptions to energy shipments persist into the second half of 2027.

Baseline scenario: growth slows, inflation climbs

Under the central forecast, global GDP growth is projected to slow from 3.4% in 2025 to 2.8% in 2026, before recovering to 3.1% in 2027. The US economy is expected to expand by 2.0% this year, down from 2.1% in 2025, while the eurozone is forecast to grow by just 0.8%. Germany, Europe's largest economy, is projected to grow by 0.7% in 2026, a downward revision from the 0.8% forecast in March and 1.0% in December. For 2027, Germany's growth forecast was cut from 1.5% to 1.1%.

Uncertainty has increased again. Rising energy prices due to the war in Iran are negatively impacting Germany's private consumption and investment.

Inflation is already rising. Eurozone consumer prices increased by 3.2% year-on-year in May, up from 3.0% in April, according to Eurostat. The OECD expects G20 inflation to reach 4.0% in the baseline scenario before easing to 3.1% in 2027. The US is forecast to see inflation of 3.7% this year, well above the Federal Reserve's 2% target, while the UK is projected to match that rate. Switzerland stands out with expected inflation of just 0.7%.

The 'dark scenario': prolonged disruption

If the Strait of Hormuz remains effectively blocked and energy flows are disrupted into the second half of 2027, the OECD warns that global growth could fall to 2.1% in 2026 and 1.8% in 2027. Such rates are, the organisation noted, "extremely low outside of big global recessions such as the global financial crisis or the pandemic." Under this scenario, inflation in the G20 could climb above 5%, driven by oil prices rising from around $100 per barrel to $115 per barrel over an extended period.

The longer the disruptions last, the greater the economic and social costs will be.

The OECD cautioned that some economies could be pushed "into or close to recession," with rising unemployment, falling investment, and increasing financial market risks. Central banks, including the US Federal Reserve, would need to respond by lifting interest rates by at least half a percentage point to contain inflation risks.

Country-level impacts

Japan's growth forecast was lowered to 0.6% in 2026, down 0.3 percentage points from the previous report, with the OECD citing headwinds from rising energy import costs. For 2027, Japan's projection was cut to 0.8%. China's forecast was raised to 4.5% for 2026, while India's was lifted to 6.3%. Ireland's economy is projected to contract by 1% in 2026 due to the unwinding of export front-loading, geopolitical uncertainty, and higher energy prices, before growing by 2.9% in 2027.

Geopolitical context and policy warnings

The OECD's report was released against a backdrop of renewed hostilities. Iran attacked a US military base in Kuwait in response to American strikes against military targets in southern Iran, dampening hopes for a deal to reopen the Strait of Hormuz. The US also announced new tariffs against 60 countries.

The OECD stressed the need to reduce dependence on imported fossil fuels and strengthen supply-chain resilience. It also warned against blanket relief measures such as tax cuts and price caps, arguing that they weaken incentives for energy conservation.

We must invest more urgently than ever to free ourselves from dependence on imported fossil fuels.